• February 2019
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Why would an early-stage investor specifically not prefer a convertible note structure to straight equity (e.g., a priced/valued preferred stock financing)?

This is one of the most asked question from a beginner investor. Because the economy is in a constant volatility, you simply cannot choose between these two. It depends on the situation. Even though convertible notes structure comes with a lot of advantages, they might not be the best option when it comes to first-time investors, for the following reasons:

  • Early stage investors take a bigger risk. Even if we’re talking about a financing risk or a market risk, a first-time investor has a lot more to worry about. That’s why, it’s better to remove and risk source and to go with a more safe method, even though it will diminish your potential incomes.
  • A first-time investor needs capital more than anything. That’s why, it’s important to create an investment fund, and to withdraw your personal money as soon as possible. You can take higher risks later, when you’ll already have a steady source of financing.
  • A common mistake for a lot of fresh investors, is to opt for a convertible debt with a cap. This procedure sets a maximum price instead of a relevant price. For a beginner is easy to lose money this way and to put an useless ceiling which just gives away an important percent of his company. Don’t do that. Put some equity in your investment and negotiate a price in the first place. For more angel seed investments you should check this link: [Angel seed investing].
  • A convertible note structure is often attractive, as it significantly reduces the legal expenses and it eases the whole process. The false feeling that a certain deal is competitive, might determine a combo of wrong decisions, which could be avoided through a straight equity investment. For more info about that, check this blog: [Raising Angel Money].

Hope this helps! It really helps to speak with an attorney when it comes to this stuff. There are experienced business attorneys available at LawTrades. We’re a legal marketplace which makes the legal experience more easy and affordable for clients. Feel free to message me w/ any questions!

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